Jimmy Stewart’s lesson for the euro zone

Commentary: Euro will remain under pressure

MichaelCasey

An earlier version of this commentary mischaracterized Eurogroup head Jeroen Dijsselbloem’s comments on how the Cypriot model could be used in other financial rescues. This has been corrected.

Reuters

Anti-bailout protesters hold a banner and a Cypriot flag.

NEW YORK (MarketWatch) — Whenever talk of a bank run hits the news, columnists inevitably trot out references to that scene from “It’s a Wonderful Life,” in which Jimmy Stewart’s character, George Bailey, convinces his panicked depositors to keep their money in his bank.

There are reasons for this instinctive reach for the cliché. (He says sheepishly.) Even in this era of hyper-globalized finance, the art of preventing a bank run is little different from when community bankers such as George Bailey resorted to confidence-building words to dissuade local savers from fleeing with their money.

By George Bailey’s standards, the European Union’s handling of the Cyprus financial crisis was an unmitigated disaster. Not only did leaders in Brussels, Germany and Nicosia fail to convince depositors that their money was safe in Cypriot banks, they also managed to undermine the confidence of depositors and investors in other banks across Europe. If it was a bad idea to disclose a tax on Cypriot deposits two Saturdays ago, right after the country’s regulators imposed a bank shutdown, it was madness to hint at that option weeks beforehand. The inevitable exodus of funds only increased the size of the recapitalization the banks would require.

Getty Images

Jeroen Dijsselbloem, Dutch Finance Minister and president of the Eurogroup Council .

But nothing compares to the spectacle Monday, when Jeroen Dijsselbloem, the Dutch finance minister and new head of the Eurogroup of finance ministers, singlehandedly converted a localized bank run into what almost became a Europe-wide one. In a couple of media interviews, he suggested that the Cypriot bailout model could be applied to financial rescues in other countries facing crises across the euro zone. Breaking with the official refrain that Cyprus was an isolated case, he thus hinted that depositors in other debt-laden countries might get the same treatment. Markets quickly tanked, most notably bank shares in Italy, which fell so far that trading in them was briefly halted Monday.

While Dijsselbloem later backtracked, rather clumsily, a few hours later he was at it again. “Not all risks should be carried by the state or the taxpayer,” he said on Dutch TV about euro-zone bailouts in general. “Shareholders, bondholders and depositors could also contribute.” He then said something similar in Dutch parliament on Tuesday.

Maybe the hitherto low-profile Dijsselbloem — whose name suddenly posed a pronunciation challenge for TV anchors across the English-speaking world — deserves more sympathy. Indeed, and since I’ve already opted for movie metaphors, we could say the Dutchman suffers from the same condition that afflicted Fletcher Reede, Jim Carrey’s character in the movie “Liar Liar” — an inability to lie about anything. Dijsselbloem appeared to be telling it as it is: Ultimately, it is truly fairer to share the costs of a bank bailout among all who took risks to fund the banks — shareholders, bondholders, and depositors alike — than it is for taxpayers to bear them. It’s just that in a market-based system, where public confidence in the financial system is a prerequisite for a healthy economy, it is often better for political leaders to keep such ideas to themselves.

Cypriots turn to self-reliance after bailout deal

(3:41)

Cyprus may have reached a bailout deal with its creditors but the Cypriots themselves are being hit hard by the country’s financial crisis. The country is turning to its history of self-reliance to cope with crisis.

Yet the confidence problem that plagues the European financial system can’t really be blamed on people such as Jeroen Dijsselbloem. It stems from the flawed political structures of the euro zone itself. The only reason an investor in an Italian bank should take fright when something happens in a tiny country such as Cyprus is because the ties that bind euro-zone member states are still too fragile. The unfinished job of fiscal integration, the failure to reach a sufficient level of shared cost and political determination that a breakup is all but impossible, is what breeds fear of system-wide meltdown.

After the 2008 crisis, hundreds of George Bailey-like banks went under in the U.S., but while this was, indeed, an economic tragedy, it was unimaginable that such problems would lead the states in which those banks were headquartered to consider leaving the American union. That notion — call it the unthinkability of monetary disintegration — is what the euro zone needs if it is to stop localized problems from becoming continent-wide crises.

In the end, the fallout from the Cyprus saga had far less to do with Dijsselbloem’s frank statement than with the euro zone’s failed process of integration. Until a fiscal and political union is forged, these episodes will continue and the euro will remain under pressure.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.